Keywords: Plant deaths, business cycle
Abstract: Because plant deaths destroy specific capital with large local economic impacts and potentially important macroeconomic
effects, understanding the causes of deaths and, in particular, why they are concentrated in cyclical downturns,
is important. The reallocation-timing hypothesis posits that plants suffering adverse permanent demand/productivity
shocks delay shutdowns until cyclical downturns when plant capacity is less valuable, while the fragility hypothesis
posits that shutdowns occur in downturns because the option value of maintaining the plant through weak demand periods
is too low. I show that the effect that a plant's specific capital has on the timing of plant deaths differs across
these two hypotheses and then use this insight to test the hypotheses' relative importance. I find that fragility is
the dominant cause of the countercyclical behavior of plant deaths. This suggests that the endogenous destruction of
capital is likely an important amplification and propagation mechanism for cyclical shocks and that stabilization
policies have the benefit of reduced capital destruction.
Full paper (293 KB PDF)
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Last update: September 12, 2006